PAC 2015-16

"I am not bothered too much about what others think of our international reputation when it comes to attracting companies to our shores because other countries do other things to attract companies into their jurisdictions and have been doing so since the year dot."

PAC meeting | Feb 12, 2015

IDA Ireland and Enterprise Ireland called and examined

[Extract]Deputy John Deasy: I want to ask Mr. Shanahan about our competitiveness and issues that derive from this building, what the Legislature is doing, how it affects our competitiveness and how he does his job, and our attractiveness or lack thereof when it comes to potential investors in the country.

It is a while ago now, but it was announced in the budget that the double Irish taxation scheme was to be ended, ultimately, at the end of 2020 and, for new entrants, this year. As Mr. Shanahan will be aware, it would require all companies registered here to be tax resident also. I will not go into the rights and wrongs of ending the double Irish. I presume that there were opinions given within IDA Ireland.

I have a strong opinion on the ending of the double Irish. I do not agree with it, and I never have. It worries me when law makers in the United States are now talking about further legislation that needs to be enacted, such as the anti-inversion in Congress which would allow addresses to be changed if there was a takeover to allow a company to avail of a low-tax regime.

Everybody thinks this is great, we are civically minded globally and it is a wonderful step forward, etc. I am not so sure this economy is in a place to be so generous with regard to giving up what Mr. John Sculley, former CEO of Apple, referred to as our "edge" when it comes to attracting businesses. I agree with him.

What I am asking Mr. Shanahan is how, from this point on, he will gauge what effect the ending of the double Irish will have on companies that potentially would be investors in this country. How will he find out how disastrous or otherwise this could be?

What kind of a system of communication does he have in place with these companies and potential investors to ascertain the effect that something like this could have on the economy because, potentially, it could be quite damaging? I will ask Mr. Shanahan that first and maybe get into other competitiveness issues that arise.

Martin Shanahan: I thank Deputy Deasy for those questions. To start with, I will comment on our overall competitiveness and tax, and, if there are other questions, on competitiveness.

Ireland's competitiveness has improved dramatically in the past number of years. It declined dramatically in the 2000s and it was more challenging to attract foreign direct investment as a result. Costs were too high. Resources were being supplied to areas which were unsustainable. Obviously, we know what the result of that was. Our competitiveness has now improved. I would say that, at all costs, we need to protect our competitiveness.

Our competitiveness is not just around taxation. There is probably, in the international debate and sometimes in the Irish debate, an undue emphasis on taxation in that competitiveness is about everything. It is about the costs, infrastructure, the availability of talent, the attractiveness of the locations to which we are trying to bring companies, etc.

All of the international rankings, as I said in my opening statement, show that Ireland's competitiveness is improving. The difficulty with international rankings is that they typically lag and they are telling one something after the fact, and we need to be mindful and ensure that they continue to increase and that we stay there.

In relation to the changes that were made in the 2015 budget regarding tax, first, the changes to the residency rules that Deputy Deasy is referring to were not made in isolation. They were made in a context where other parts of our tax code were improved, particularly - I mentioned some of them in my opening statement in relation to the amortisation of intellectual property - in relation to SARP and, indeed, to personal taxation rates.

Obviously, the budget also announced that the Government intended to introduced a knowledge development box. I would put all of those in the plus category of making Ireland more attractive to foreign direct investment.

In relation to the change to residency rules, I believe that over the long period that will also be a positive because it was something that was being used to point to Ireland, and causing damage to our international reputation.

The change was well handled. We had engagement with our clients prior to the changes in the run up to the budget - obviously, nobody knows what the changes will be until budget day but we obviously plan for all eventualities. Once the budget was announced, we had engagement with our clients about it. I wrote to every client of IDA Ireland on the day the budget was announced.

We followed that up with engagements through all of our executives on the ground in market, at corporate and in Ireland, and we also had a number of investment marketing missions directly after the budgetary process in order to speak to our clients directly in market.

There are a number of ways one gauges what the impact will be over time. First, one speaks to the clients and asks them what their response is, and for the most part that response has been positive. It is not universally positive, as Deputy Deasy would expect, but for the most part it has been positive.

It impacts on different IDA Ireland client companies in different ways. There is a small number who may have availed of structures. They now have to find an alternative to that structure. For those that are operating already, they have over six years in which to do that from the point it was announced.

There are those who may have believed that the existence of such structures was doing damage to Ireland's reputation and was causing them a difficulty in terms of their investment in Ireland, and would have very much welcomed the changes. There are those for whom this has no bearing at all, which would be a large part of the portfolio, including emerging companies who are still in ramp-up stage and for whom tax does not feature. There is a whole-----

Deputy John Deasy: That is fair enough. I accept where Mr. Shanahan is coming from - that competitiveness has improved and it took a dip - and I take what he is saying with regard to these companies.

My opinion is that in talking about tax avoidance, which, effectively, is what this scheme was, I am not bothered too much about what others think of our international reputation when it comes to attracting companies to our shores because other countries do other things to attract companies into their jurisdictions and have been doing so since the year dot.

When one asks a CEO of a company about a tax avoidance scheme, which it has availed of and which brought it to this country in the first place in many respects, he or she may not verbalise the impact of this entirely. Moreover, my personal experience has been that while it is something of which such people will avail and use to the full, they will not talk to a journalist and agree it absolutely was why they came here and why they are staying here.

The ESRI carried out a pretty good study on this issue and the analysis it came up with, having surveyed the companies, was that had Ireland a European Union average rate of 22.5%, and the number of multinationals between the years 2005 and 2013 would have been 60, not 130. The ESRI considered four measures of Ireland's corporation taxation, namely, the policy rate, the mean effective average tax rate, EATR, the total tax rate and the cross-border EATR.

Ultimately, the ESRI's analysis was that even were one to bring the rate down to 15% as opposed to 12.5%, some 20% of those companies that had been attracted here previously under the old regime would not have come. I do not state that we have a problem and am not getting into the rights and wrongs of it.

I do not really care if commentators say it is wonderful, Ireland is very fair, it is good and so on. The potential impact here worries me because companies will not verbalise this, although they may do so behind closed doors to a certain extent. I believe we have a problem and if we identify a problem in the coming months with regard to potential investors, we need to do something about it.

Martin Shanahan: I will respond on a couple of things. First, I had intended to say there are a number of ways. One way is to ask them. Second, one looks at what they do next and where they put their next investments. Moreover, one looks at where potential investors are putting their investments.

As one of the more obvious items of evidence that this has not had a detrimental impact, I would point to the pipeline of investments since the budget was announced. I also note that even in advance of the budgetary announcement, there was a high degree of expectation among the international investment community that Ireland would do something in this area and still, we see very large investments coming through the pipeline.

I absolutely agree with the Deputy and equally and obviously, my only interest is in how do we remain competitive. The statistics the Deputy used with regard to how tax has been an attractive and compelling reason for people to come to Ireland are absolutely correct. It also was right for the time.

However, if our competitive advantage increasingly is being used against us and is causing other companies not to invest here, this may have been an issue. It is also more of a question of timing, in that a number of international processes are under way of which the committee would be aware, such as the base erosion profit shifting, BEPS, project through the OECD or initiatives through the European Union and the United States.

One point that is clear from all those processes is the thrust of them is that substance and tax liability will be ever more closely aligned. Ireland has set out a clear roadmap and has stated what it is going to do over the years ahead. This has given investors a lot of confidence and clarity, which is not evident in all countries.

It has removed one of the structures that may be causing us a difficulty from a reputational perspective. I am not just talking about causing Ireland reputational difficulty but about causing difficulty to potential investors.

The Minister reiterated on the day of the budget that our 12.5% rate was not up for discussion and one should remember that the more that these two things, substance and tax liability, become aligned, the more attractive the 12.5% rate becomes.

Deputy John Deasy: I take Mr. Shanahan's point about the pipeline and the volume within it increasing. However, to a certain extent this is conjecture and theory with regard to the impact this will have on the existing multinationals between now and 2020. We do not know yet.

Martin Shanahan: It is all a judgment and all we can do is what we do currently. We are engaged with companies every day of the week trying to work out what will differentiate Ireland. Increasingly, given the global changes I have outlined, tax will continue to be part of our competitive offering and we should make it as competitive as we can.

For instance, in the context of introducing a knowledge development box, the Minister used the phrase that it will be best in class and aligned with international best practice. We should go to the very extremes in all of what we do to attract investment.

However, we also need to do the other things that would give us even greater differentiation and more competitiveness in respect of the availability of talent - which is where all the actual differentiation will come in future - having the available infrastructure, having the property solutions and having attractive places in which to live and work.

They are equally important and for a lot of the cohort of companies we are attracting, they want to know that they actually can do things in Ireland. They want to know that they can set up and they want to scale up quickly before they ever get to the point where they are talking about paying taxes.

Deputy John Deasy: That is fair enough. Mr. Shanahan has answered the question. IDA Ireland is obviously thinking about this in terms of communication with the companies involved.

On a similar theme, I have a concern about Ireland's economic position in respect of what happens within Leinster House and what is passed that potentially could affect our competitiveness. Within the next couple of months, collective bargaining legislation will be introduced in this House. It is probably good that none of my Labour Party colleagues are present.Chairman: They probably will hear about it.

Deputy John Deasy: It would not be the first time. I am unsure how wise it is to pass legislation that potentially will have an impact on, for example, a company from the United States.

If such a company did not recognise a union - I acknowledge that mandatory union recognition is not being proposed - it certainly would allow a union to drag a company to the Labour Court. This is a position that has not existed since the Industrial Relations Act was ruled unconstitutional by the Supreme Court back in 2007.

The general feeling from people who deal with labour law is this probably is not necessary and that the existing laws are pretty robust when it comes to employer-employee relations and in negotiations in the matrix that is there already. Personally, I do not believe this is the right time for such legislation.

When it comes to something like this, obviously the American Chamber of Commerce Ireland has been involved in negotiations and has an opinion. It believes - it is not alone in this belief - that in respect of dealing with the Government on this, the process has been good. Did IDA Ireland give an opinion on the timing of this legislation?

Does it have an opinion with regard to legislation like this and on this legislation specifically, as well as on its timing? As we have just ended the double Irish, we do not really know what will happen.

The last thing we should be doing is passing more legislation that could put a doubt in the mind of any investor from the United States about coming to Ireland. It is not rocket science. I believe the timing is bad and that we should hold off until this economy recovers to the point where consideration can be given to such legislation.

Mr. Martin Shanahan: I thank the Deputy. At a high level, I should state, first, that anything the Houses do in respect of legislation should always have an eye to competitiveness.

As people who market Ireland as a location for investment on a daily basis, the more positive things we have in our tool bag and the fewer negative things, the better. It is important to note that in respect of labour market flexibility, Ireland scores really highly on all international barometers.

It is important to note - so that this is not taken out of context - that we really do well in this regard and I believe it is a tick in the favourable column for companies. In respect of the specific proposed legislation mentioned by the Deputy, my understanding of it is that it tries to strike a balance between protecting the competitiveness of Ireland as a location for multinationals and indigenous companies and protecting the rights of employees to engage in collective bargaining.

There has been significant engagement with both employers and employee representative groups during the course of developing the proposed legislation. The American Chamber of Commerce, AmCham, IBEC and the trade unions have all engaged with the Department of Jobs, Enterprise and Innovation and bilaterally.

The legislation continues the tradition of the voluntarist nature of collective bargaining while seeking to protect employees. It tries to seek this balance and if it succeeds, well and good. We have yet to see the drafts.

Deputy John Deasy: It comes back to finding out what the potential impact of this is. We need to keep an eye on it. If it is passed this year, we must be cognisant of the effect it might have on any multinational that might consider Ireland. This is just one of many issues.

Chairman (Deputy John McGuinness): It is more of a policy issue.

Deputy John Deasy: Yes, but the IDA will deal with companies that might potentially invest in Ireland. My concern is that we are lining up reasons for them not to come here, and doing so at the wrong time.

It is not the IDA's fault but is done because of political agendas. I met groups that are involved in these negotiations and they are very clear that in their opinion it is not needed.

Although the process has been good and they have been pleased with the Department and other people involved, everybody to whom I speak asks what we are doing. While the IDA and Enterprise Ireland are doing an amazing job, the legislation we pass must correlate what their work is about.

There is a danger that we are putting impediments to investors where we should not be.